Google Finance RSI Explained

Understanding RSI on Google Finance

The Relative Strength Index (RSI) is a popular momentum indicator used in technical analysis. It’s designed to measure the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. Google Finance provides access to RSI data, making it a valuable tool for investors.

What is RSI?

Developed by J. Welles Wilder Jr., RSI oscillates between 0 and 100. Traditionally, an RSI above 70 is considered overbought, suggesting the asset may be overpriced and due for a correction. Conversely, an RSI below 30 is considered oversold, suggesting the asset may be undervalued and poised for a rebound.

How RSI is Calculated

The RSI is calculated using a formula that considers the average gains and losses over a specific period, usually 14 periods (days, weeks, months, etc.). The formula is as follows:

RSI = 100 – (100 / (1 + RS))

Where:

RS (Relative Strength) = Average Gain / Average Loss

The average gain and loss are calculated over the chosen period. For the initial period, a simple average is used. For subsequent periods, a smoothing technique is applied to better reflect recent price changes.

Using RSI on Google Finance

Google Finance allows you to view the RSI of various assets directly on their charts. To access it, search for the stock you’re interested in. Then, select “Technical Indicators” below the chart, and search for “RSI”. You can adjust the period length in the settings. By default, it will display the 14-period RSI.

Interpreting RSI Signals

While the 70 and 30 levels are standard benchmarks, investors may adjust these based on the specific asset or market conditions. Some analysts use 80 and 20 as overbought and oversold levels in strong trending markets. Furthermore, divergence between the price and the RSI can provide valuable signals. For example, if the price makes higher highs but the RSI makes lower highs, it could indicate a weakening trend and a potential reversal.

Limitations of RSI

RSI should not be used in isolation. It’s best combined with other technical indicators and fundamental analysis to make informed investment decisions. The RSI can give false signals, particularly in strongly trending markets where an asset can remain overbought or oversold for an extended period. Additionally, the RSI calculation depends heavily on the chosen period, and different periods can produce different results.

Conclusion

The RSI is a valuable tool for identifying potential overbought or oversold conditions. Google Finance provides easy access to RSI data and charts, enabling investors to incorporate this indicator into their analysis. However, remember to use the RSI in conjunction with other indicators and perform thorough due diligence before making any investment decisions.